Personal Taxes and Corporate Cash Holdings

55 Pages Posted: 25 Mar 2020

See all articles by Jens Dick-Nielsen

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Kristian R. Miltersen

Copenhagen Business School

Ramona Westermann

Copenhagen Business School

Date Written: February 28, 2020

Abstract

Dividends are taxed at the investor level, but injecting funds into firms does not offer investors the symmetric tax benefit. Hence, there is a tax saving incentive to retain cash in the firm. We theoretically and empirically show that this tax saving motive is important for corporate cash holdings. We develop a dynamic corporate finance model of liquidity management, in which the firm's liquidity policy trades off precaution and saved personal taxes against agency and corporate tax costs. The model implies that corporate cash holdings are substantial and increasing with the dividend tax rate. To identify the empirical relation between dividend taxes and corporate cash accumulation, we use the 2003 dividend tax cut. Consistent with a reduction of the tax saving motive owing to lower dividend taxes, treated firms reduce their cash accumulation after the cut.

Keywords: Dividend Tax; Capital Gains Tax; Cash holdings; Agency Costs; Tax Savings Motive

JEL Classification: G31; G32; G35; H24; H32

Suggested Citation

Dick-Nielsen, Jens and Miltersen, Kristian Risgaard and Westermann, Ramona, Personal Taxes and Corporate Cash Holdings (February 28, 2020). Available at SSRN: https://ssrn.com/abstract=3545765 or http://dx.doi.org/10.2139/ssrn.3545765

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Kristian Risgaard Miltersen

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Ramona Westermann (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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